Someone Forgot to Tell Bond Buyers There’s a Deficit Crisis

President Obama said that the U.S. deficit is a “concrete impediment” to U.S. growth and Pimco’s Bill Gross said this nation is in worse shape than Greece Monday. This month, the battle over raising the country’s debt ceiling is likely to be a nice preview of the bipartisan budget battle that will rage until the final moments of Election Day, 2012.

So why do investors continue to buy Treasuries, with the 10-Year note closing below three percent once again today?

“Markets have no macroeconomic grounds for believing that the budget position of the U.S. is unfixable,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics, in a controversial note to clients. “Investors might question the will of politicians to make difficult decisions to address the long-term fiscal issues, but on current projections, health spending – by far the biggest problem – will only start to become seriously unmanageable about 20 years from now.”

The economist argues that government spending will come down as economic growth surprises to the upside. He also provides a chart going back to 1960 showing no correlation between budget deficits and the 10-year note.

But other investors say the rising fear and rhetoric over the deficit will soon be realized in the bond market through rising rates once Fed Chief Ben Bernanke ends his quantitative easing plan this month and the training wheels come off.

"The US Treasury market is the most manipulated market in the history of the world thanks to 'Bernanke Capital Management,'" said Peter Boockvar, chief equity strategist at Miller Tabak. "Trying to tie outside fundamental influences to look for a reaction in Treasuries is tough under current circumstances. When the Fed is done buying we can peel away some of the manipulation and see what the Treasury market really has got in terms of pricing."

The "budget" is usually relegated behind jobs and economic growth among the major worries of the public, but in a Gallup poll back in April concern about the federal budget and deficit reached its highest level in 15 years. Ironically, this very same public may be turning to Treasuries as safehaven, giving bid to the very securities that theoretically would suffer most if their fears of a U.S. default are realized.

"Is the bond market saying deficits don’t matter?" asked Patty Edwards of Trutina Financial and 'Fast Money.' "Or is it saying that everyone is scared and going to the one place where they think they’ll get their money back?"

It may also be that the U.S. just has to be the best bond on the global block. European finance ministers are holding an emergency meeting Tuesday about a rescue package for Greece and a consensus does not look clear. The U.S. does not need outside help. It can just print more money.

Of course, as even High Frequency's Shepherdson warns, devaluing a currency too much could lead to inflation, the ultimate bond killer.

"We are living through the biggest economic experiment in modern history," said Brian Kelly of Brian Kelly Capital. "The entire experiment relies on the false assumption that the government can borrow without limit. This has never, ever been a true assumption."

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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